More and more countries are pushing to manufacture their own semiconductor chips, which are scarce worldwide because “it’s a national security issue,” said a Moody’s analyst.
Memory chips are critical to the manufacture of a wide range of products. They’re found in smartphones, game consoles like PlayStation 5, household appliances like refrigerators and washing machines, alarm clocks and even cars. They are also used in data centers that are full of computer servers.
“I think the main problem really is that new supply is hard to come by and the surge in demand won’t help anytime soon,” Timothy Uy, associate director at Moody’s Analytics, told CNBC’s Squawk Box Asia on Monday. .
“I think companies are adapting on both the supply and the demand side. Governments are also involved because they see it, in a way, as a kind of national security issue, ”he added.
A wafer is processed in a single wafer diffusion mechanism at GlobalFoundries’ semiconductor manufacturing facility in Malta, New York, on March 16, 2021.
Adam Glanzman | Bloomberg | Getty Images
Why there is a global chip shortage
Making semiconductor chips is a complicated, capital-intensive process that requires weeks of production, Uy said in a note last week. It will take longer to distribute, he said.
He explained that new offerings cannot be created immediately – and sometimes it can take years for new offerings to be online as factories have to be built and equipped with the right technology.
The capital-intensive nature of semiconductors also places manufacturing in the hands of a few companies, and the barriers to entry for new companies rise with new generations of chips.
The manufacturing process for each generation of semiconductor chips is different. Newer chips have bigger margins – this gives big manufacturers more incentives to invest in their production rather than redirecting resources to increase capacity for older generation chips, Uy said.
That’s partly why the auto industry is struggling, he explained. Cars require thousands of chips, mostly older generations, compared to smartphones and other devices that require a handful of newer ones.
Still, Uy told CNBC that many new deals are coming online as the biggest chipmakers – such as Taiwan Semiconductor Manufacturing Company, Samsung Electronics, and UMC – invest capital in building new factories.
What countries are doing to boost the chip supply
Governments have committed to investment and are pursuing measures to increase chip manufacturing capacity and create local supply chains that can bypass bottlenecks.
South Korea, for example, has announced a program worth around $ 450 billion by 2030 that includes business investments. It has also topped up tax breaks to make its chipmakers more competitive.
China has set up multibillion-dollar national funds to invest in local chipmakers to catch up with countries like the United States, South Korea, and Taiwan.
The United States has passed a technology and manufacturing bill that includes $ 52 billion to fund semiconductor research, design, and manufacturing initiatives. The European Union is also ready to provide substantial funds for the expansion of semiconductor manufacturing in the EU.
Government involvement could help improve the playing field and alleviate some of the scarcity pressures – especially the price of memory chips, as only a handful of global companies dominate the supply chain, Uy told CNBC.
As soon as governments “essentially subsidize local, smaller companies as well, and indirectly support a lot of them indirectly, in order to get into the production of low-end chips, it basically increases supply,” he said, adding that this is the supply shortage for Automaker.
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